Proposed regulations update QDOT regulations

Editor: Susan M. Grais, CPA, J.D., LL.M.

The IRS issued proposed regulations (REG-119683-22) that would update the qualified domestic trust (QDOT) regulations under Sec. 2056A. The proposed regulations would primarily affect estates of decedents that pass property to or for the benefit of a noncitizen spouse through a QDOT.

Proposed regulations

Removal of references to temporary regulations: Due to an oversight in final regulations published in 1996 under Sec. 2056A, the references to the temporary regulations were not updated. As a result, the proposed regulations would update the regulations under Sec. 2056A by replacing references to Temp. Regs. Sec. 20.2056A-2T(d) with Regs. Sec. 20.2056A-2(d).

“Finally determined” definition: Currently, Regs. Secs. 20.2056A-2(d)(1)(i) and (ii) contain additional requirements for QDOTs — one of which depends on the fair market value of the assets passing to the QDOT as “finally determined” for federal estate tax purposes. The definition of “finally determined” depends on the IRS’s issuing an estate tax closing letter, which it routinely did before June 1, 2015. Because the IRS no longer routinely issues estate tax closing letters, the proposed regulations would update the definition of “finally determined” in Regs. Sec. 20.2056A-2(d)(iii) so it conforms to the current IRS procedures for establishing an asset’s value.

Removal of offices and addresses: Regs. Sec. 20. 2056A-2(d)(1)(i) requires QDOTs with assets of more than $2 million to satisfy one of three alternative security arrangements for paying the Sec. 2056A estate tax. The regulations direct QDOTs to specific offices and addresses for submitting notifications to the IRS if a security arrangement is replaced or not renewed.

Regs. Secs. 20.2056A-4(c)(6) and (c)(7) direct taxpayers to file an “Agreement to Pay Section 2056A Estate Tax” with the district director and an “Agreement to Roll Over Annuity Payments” with the assistant commissioner (International).

Because the offices and addresses listed in Regs. Sec. 20.2056A-2(d) no longer exist, the proposed regulations would remove references to those offices and addresses and direct taxpayers to IRS Publication 4235, Collection Advisory Offices Contact Information, or as otherwise provided in IRS forms and instructions or on irs.gov, to determine the correct address for submitting the required notifications. Additionally, the proposed regulations would update Regs. Sec. 2056A-4 to direct taxpayers to file both agreements with the chief tax compliance officer, their delegate or designee, or as provided in the forms and instructions or on irs.gov. 

The proposed regulations also would remove references to Uniform Customs and Practice for Documentary Credits, 1993 Revision, of International Chamber of Commerce (ICC) Publication 500 because it is no longer the most recent edition of that publication. They would direct taxpayers to the most recent edition of Publication 500.

In addition, the proposed regulations would no longer require taxpayers to attach the security instrument to the decedent’s federal estate tax return. Instead, taxpayers would submit the security instrument to the Estate Tax Advisory Group, the contact information for which can be found in Publication 4235, IRS forms and instructions, or on irs.gov.

Filing requirements and payment of Sec. 2056A estate tax: Regs. Sec. 20.2056A-11(a) directs taxpayers to Temp. Regs. Sec. 20. 2056A-2T(d)(3) for the requirements for filing Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts. The proposed regulations would update Regs. Sec. 20. 2056A-11(a) to direct readers to Regs. Sec. 20. 2056A-2(d)(3) instead.

Regs. Secs. 20.2056A-11(c)(1) and (2) state that the district director or the director of the service center where the Form 706-QDT is filed may grant an extension of time for paying the Sec. 2056A estate tax. The proposed regulations would update the current regulations by replacing references to “the District Director or the Director of the service center where the Form 706-QDT is filed” with “the Advisory Group Managers (or their delegate or designee or as otherwise provided in IRS forms and instructions or on https://www.irs.gov).”

Implications

The proposed regulations update a number of outdated references, information, and procedures contained in the previous temporary regulations under Sec. 2056A. Taxpayers considering a QDOT or currently administering a QDOT should review the proposed regulations for the updated references and procedures.

Editor Notes

Susan M. Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C. For additional information about these items, contact Grais at susan.grais@ey.com. Contributors are members of or associated with Ernst & Young LLP.

The views expressed are those of the authors and are not necessarily those of Ernst & Young LLP or other members of the global EY organization. This information is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide accounting, tax, or other professional advice.